Student loans will be interest free for many 2012 starters

On principle I hate the fact 2012 uni starters aren’t just going to pay for their education, but for financing it too. For the first time students will be charged ‘real’ interest rates. This may seem a contradictory start to a blog promising interest free loans, but that’s because, yet again with student finance, principle and practice diverge.

On Monday university application figures are released. Almost certainly they’ll have dropped (though not all will be due to fee fear). One of parents’ key concerns is the interest cost. Yet in reality, a sizeable chunk of graduates in lower-earning professions will not only find their interest set near the rate of inflation, but won’t ever actually need to repay that interest.

Unless you know the system, to make this easier to understand, you’ll find it helps if you first read my detailed Student Loans 2012 myth busting guide. But even if you don’t, you should still get a rough idea from what’s below.

Student loan interest rates

For current graduates the maximum interest rate possible is the RPI measure of inflation, though the rate for most students is much lower than that (see the Should I repay my student loan? guide for details of who pays what).

That means there’s no ‘real’ cost to these loans. If you borrow an amount of cash that’d buy "a shopping trolley’s worth of goods", you repay whatever it costs to buy the same "shopping trolley’s worth of goods" in the future. In other words, borrowing the cash doesn’t alter your spending power.

The 2012 system works rather differently…

While studying: Interest = RPI inflation + 3% until the April after graduation when it changes to…

So the rate is certainly much higher – and as I said earlier – personally I object to ‘real’ rates on principle, yet… The reality is some students won’t pay it

The amount 2012 starters will repay is dependent primarily on their graduate earnings – for 30 years you pay 9% of everything earned above a threshold which will be £21,000 at first, but will rise with average earnings after. That is far more important for many than the amount they originally borrow.

What that means is many graduates won’t repay what they owe in full before the debt wipes out after 30 years and, at a lower level of earnings, many won’t ever repay what they originally borrowed. I’ve plugged these numbers into www.studentfinancecalc.com where you can work out how much you’ll repay (you can see the mathematical assumptions used to calculate this there too).

Starting salary (then annually rises by RPI =3%)

3 years worth of fees and maintenance loans

Total repayment (at today’s prices)

Real interest cost (ie, in today’s prices)

£15,000

£43,500

£0

-£43,500

£20,000

£43,500

£7,200

-£36,300

£25,000

£43,500

£24,900

-£18,600

£30,000

£43,500

£43,000

-£500

£40,000

£43,500

£79,000

£33,500

£50,000

£43,500

£67,400

£23,900

As you can see in this table, the only people who pay interest are those on starting salaries above £30,000. Though take the actual numbers with a pinch of salt as the assumptions make a big difference – it’s more the general point that the interest rate only actually impacts on the repayments of some.

Also remember the table assumes people are working for the whole 30 years before the debt wipes – many (especially women) will take some time off during that period, which reduces repayments further.

Though of course for higher earners, it shows the interest can be huge too.

If you’re wondering why those at £50,000 pay less than at £40,000, it’s simply because as they earn more, they repay more quickly, so less interest accrues.

Now of course that doesn’t make it more favourable than the current system – where many more repay all that’s borrowed, because of course the price has shifted higher – but it does mean the fear of the interest at least does need to be mitigated for many students.Related blogs/ guides

Have your say

This is an open discussion; anyone can post. Comments may be edited, and are only published during the working day. Please report any spam, illegal, offensive, racist, libellous posts (inc username) to fbteam@moneysavingexpert.com.

On 6 April, we’ll see the biggest change to hit student finance since the new system launched in 2012. It’ll mean millions of university leavers will repay less, not just each month, but many (not all) will see the amount they repay in total reduced by £1,000s. While it affects almost all uni leavers to an extent,...

Student loans are a political hot potato and widely misunderstood. I recently blogged on why, bizarrely, cutting tuition fees risks hurting not helping most graduates and within the logic of that I explained it is predicted that 83% of university leavers under the newest English system won’t repay their loans in full within the 30 years before they wipe....

The news again has been full of talk about cutting English tuition fees from £9,250 to, say, £6,000. While psychologically attractive – as it reduces the perceived ‘debt’ – the practical impact is to take money off universities, risking the quality of education, and handing it to very high-earning graduates. I bashed out this explanation on my...

Should loyal customers be charged more than new ones? On the surface the answer is a simple no – but nothing is that simple. Many consumer marketplaces function because only some people embrace competition, and we need to work out what happens if we change that

Martin's Twitter Feed

Blog Topics

Archives

How this site works

We think it's important you understand the strengths and limitations of the site. We're a journalistic website and aim to provide the best MoneySaving guides, tips, tools and techniques, but can't guarantee to be perfect, so do note you use the information at your own risk and we can't accept liability if things go wrong.

This info does not constitute financial advice, always do your own research on top to ensure it's right for your specific circumstances and remember we focus on rates not service.

We don't as a general policy investigate the solvency of companies mentioned (how likely they are to go bust), but there is a risk any company can struggle and it's rarely made public until it's too late (see the Section 75 guide for protection tips).

Do note, while we always aim to give you accurate product info at the point of publication, unfortunately price and terms of products and deals can always be changed by the provider afterwards, so double check first.

We often link to other websites, but we can't be responsible for their content.

Always remember anyone can post on the MSE forums, so it can be very different from our opinion.

MoneySavingExpert.com is part of the MoneySupermarket Group, but is entirely editorially independent. Its stance of putting consumers first is protected and enshrined in the legally-binding MSE Editorial Code.